The US dollar initially fell against the Israeli shekel early on Wednesday but has found strength later in the session as we are contesting the area we find ourselves in.
USD/ILS
The US dollar initially fell against the Israeli shekel early on Wednesday, but has turned around to show signs of life and has actually gone positive as we are in an area of significant fight. The 50-day EMA sits just above at the 2.9938 level and offers a little bit of a barrier, but this is a market that continues to see risk premium normalization. In other words, the 5-year CDS spread sits at 56 points, only 4 points above where it was on the eve of October 7th.
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The Bank of Israel policy rate is 3.5%. 3 cuts this year in January, May, and July have moved the markets, citing shekel strength, inflation below the 3% upper bound, and the fall in Israel's risk premium. The bank cut its inflation forecast to 1.8% and sees the rate at 3% in 12 months.
Central Bank Divergence and Rate Decisions
The next decision is the 1st of September, and the decision is live at this point. BoI head Yaron flagged it explicitly as a live meeting, keeping options open, citing labor, inflation, geopolitical, and financial risk. The CPI inflation reading was before the decision, and it now gets a lot of the big noise out of the way.
The Fed is on hold, according to the latest FOMC minutes, but with more of a hawkish lean, while the Bank of Israel could look to begin an easing cycle. It is because of this, it suggests that there is a lot of tension in this pair, because we may be in the process of seeing the overall tension of upward pressure pick up by interest rate differential alone.
Quite frankly, with the September 1st Israeli Central Bank meeting, that could determine the next move in this pair. From a technical analysis standpoint, you can make the argument that we have, in fact, bottomed, bounced pretty quickly, and now have pulled back looking to find if there's any more support to lift the greenback.
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